Sale of $1B in Houston pension bonds can proceed, judge rules

Robert Downen
| on December 21, 2017

Photo: Nick De La Torre, Staff

Houston City Hall ( File Photo)

The City of Houston can move forward with its plan to sell $1 billion in bonds on Friday as part of Mayor Sylvester Turner's landmark pension reform passed by the Texas Legislature earlier this year, a judge ruled.

State District Judge Mark Morefield on Thursday denied a request by former city housing department director James Noteware for a temporary restraining order to delay the issuance of the bonds.

The request for the restraining order was part of a lawsuit filed last Friday by Noteware, who alleges the city misled voters into approving the bonds so it could sidestep a voter-approved limit on how much property tax revenue Houston can collect. Noteware claims the ballot language was "materially misleading" and did not include wording to indicate the taxes levied to pay off the bonds would be exempted from the 13-year-old revenue cap.

City officials say the language cited by Noteware is boilerplate included to assure bondholders that the city would meet its obligations.

In testimony submitted to the court Thursday, Melissa Dubowski, assistant director of the Houston Finance Department's Treasury and Capital Management Division, said a delay in issuing the bonds could cost the city roughly $1.8 billion in benefit reductions.

Proceeds of the $1 billion in bonds, the sale of which was approved by voters last month, will be given to Houston police and the municipal employee pension funds in exchange for their acceptance of benefit cuts negotiated by Turner.

City officials also argued that Houston's credit would be irrevocably damaged by the last-minute delay in the bond issuance, citing other, recent bankruptcies filed by cities like Detroit.

"It was not the dollar amount of those pension liabilities" that led to those cities' bankruptcies," Assistant City Attorney Reagan Brown argued. "It was that, at the end of the day, the capital markets lost confidence."

Morefield said there were "substantial" concerns regarding the legality of the ballot measure, but that he ultimately agreed with the city's argument that delaying the issuance would significantly damage Houston's standing among creditors and bondholders.

"I think we're just too far down the road at this point in time to stop this train," Morefield said. "The mayor and City Council are heavily invested in this. And this thing is going to go forward.

"They may have to pay a heavy consequence for it going forward," he added.

The bonds are part of Turner's pension reform plan, which is aimed at erasing a debt of more than $8 billion over three decades owed to the city's police, firefighter and municipal employees pension systems.

The plan, which had to be approved by the Legislature this past summer, includes benefit cuts totaling $2.8 billion from the three retirement systems and includes a mechanism to cap the city's future pension costs. In exchange for the benefit cuts, the proceeds of the pension bonds are to be given to the police and municipal employee pension funds.

City officials have said that a failure to issue the bonds would unravel the agreed-to benefit cuts and quash the entire reform plan, which they said would lead to budget-busting increases in the city's pension costs.

Noteware and his attorney, Jerad Najvar, argued that if the bonds are sold and the ballot measure later ruled illegal, taxpayers would be on the hook for decades of payments to bondholders.

City officials last week called the lawsuit baseless.

Following Thursday's ruling, mayoral spokesman Alan Bernstein said in a short statement that Turner's office is "pleased" with the judge's decision. He declined to comment further.

Noteware also said he would not mind if his lawsuit scuttles the broader pension reform deal, which he said he views as inadequate.

Noteware's suit marked the third time the city has been sued in recent years over ballot language.

In 2015, after voters approved a change in Houston's term limits for elected officials, a local attorney sued, saying the ballot language obscured the actual meaning of the referendum. A state district judge last year ruled that ballot wording "inartful" but not invalid. A Texas appeals court, however, rejected the city's attempt to get the lawsuit thrown out earlier this year.

Also in 2015, the Texas Supreme Court ruled that the 2010 ballot language surrounding the imposition of Houston's drainage fee was misleading. A state district judge later voided that election.